Subsidized vs. Unsubsidized Student Loans: Understanding the Difference

Person with backpack and books is walking toward school building. — Image source: Getty Images.

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There are two main types of federal direct student loans available to current students at U.S. colleges and universities: Direct Subsidized Loans and Direct Unsubsidized Loans. Both have quite a bit in common and are available only to students enrolled at least half-time at a college or university participating in the federal direct loan program.

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In most cases, students must be enrolled in a program that will ultimately lead to a degree or professional certificate of some kind. They have the same interest rates, set annually by the Department of Education, and a loan fee of 1.057% of the initial amount borrowed. However, there are some key differences borrowers must know. We'll cover those and the pros and cons of each loan type in this article.

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As mentioned, the two loan types share quite a few similarities but also some key differences. The main difference is that the government pays the interest on subsidized student loans while the borrower is in school, on a grace period, or in a qualified deferment. In contrast, unsubsidized loan borrowers are responsible for all the interest on their loans, regardless of repayment status.

Both also have the same interest rates, which are set annually. For 2023, undergraduate borrowers pay 5.5% on both subsidized and unsubsidized loans, while graduate borrowers can obtain unsubsidized loans with a 7.05% interest rate.

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This chart breaks down some of the important qualifications and differences to know:

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Data source: U.S. Department of Education. FAFSA = Free Application for Federal Student Aid.
Qualifications and Differences to Know	Subsidized Student Loans	Unsubsidized Student Loans
What do you need to qualify?	Completed FAFSA and at least half-time enrollment in an undergraduate degree or certificate program.	Completed FAFSA and at least half-time enrollment in a degree or certificate program.
How much can you borrow?	Borrowing limits depend on the years in school and dependency status: aggregate limit of $23,000 (undergrad) or $65,500 (graduate students). (Note: Graduate students could only obtain subsidized loans prior to July 2012.)	Borrowing limits depend on the years in school and dependency status: aggregate limit of $57,500 (undergrad) or $138,500 (graduate students).
How does interest work?	The government pays the interest while in school and on qualified deferments. You pay the interest during your repayment period.	You are responsible for the interest on an unsubsidized loan at all times, even the interest that accumulates while you're in school.
Who can borrow?	Undergraduate borrowers who can demonstrate financial need.	Undergraduate and graduate/professional borrowers regardless of demonstrated financial need.

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The bottom line on subsidized and unsubsidized loans

Subsidized and unsubsidized loans are the two main varieties of federal student loans used to pay for higher education in the United States. Subsidized loans are slightly more favorable due to the government paying the interest during certain periods.

However, both types of federal loans are available to students enrolled in degree and certificate programs. They don't require credit checks, and federal student loans have certain benefits, such as the ability to enroll in income-driven repayment and eventually qualify for loan forgiveness programs.

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About the Author

Matt Frankel, CFP, is a contributing Motley Fool stock market analyst and personal finance expert covering financial stocks, REITs, SPACs, and personal finance. Prior to The Motley Fool, Matt taught high school and college mathematics. He holds a bachelor’s degree in physics from the University of South Carolina, a master’s degree in mathematics from Nova Southeastern University, and a graduate certificate in financial planning from Florida State University. He won a SABEW award for coverage of the 2017 Tax Cuts and Jobs Act. He is also regularly interviewed by Cheddar, The National Desk, and other TV networks and publications for his financial, stock market, and investing expertise.

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